Starting a tech co is easy, but being the biggest is harder than ever

12/06/2017By Sammy Abdullah, CFA

It’s easier than ever to start a business, but harder than ever to become the biggest. It’s also expensive. We did an analysis looking at the amount of capital raised by 35 tech companies prior to going public – these are some of the biggest players in their respective industries. The overall theme of the data was clear: being a big tech company takes more money than ever, and if you don’t find yourself raising lots of money to grow, rest assured you have competitors that are. While “big” and “successful” aren’t mutually exclusive – there are plenty of small, successful companies with very happy investors and founders – we all want to be the dominant player in the space, similar to the companies on this list.

-Given the data spans very diverse industries with different capital needs, it’s appropriate to look at each industry separately. For instance, because hardware companies are generally profitable quickly, the median equity raised was only $53mm through 4 rounds whereas social media companies had a median of $1.8bln through 6 rounds. Marketplaces took $100mm through 3 rounds, content distributors took on median $153mm through 5 rounds, and ecommerce took $69mm through 3 rounds (ecommerce tends to be profitable quickly so again, less equity is needed).

-Notice debt plays almost no part in any tech company’s capital structure except for hardware, which had on median $24mm of debt versus $53mm of equity ($0.44 of debt per $1 of equity). Lenders tend to be hesitant to provide debt to tech companies, which often have few hard assets to collateralize and are burning cash while they grow.

-The oldest companies on the list like Amazon, Apple, TiVo, and 1800 Flowers required very little capital relative to peers today. Equity raised by these 4 companies was $10mm, $12mm, $12mm, and $20mm respectively. This drives home the point that building a successful business takes more cash than ever. Even looking within the same industry, you can see stark differences between old companies and new: Fitbit, GoPro, and Roku have all raised over $200mm each whereas Garmin went public in 1999 on only $63mm of capital raised.

-As mentioned earlier, companies that are profitable faster need less capital. We can see this when looking at ecommerce (median equity raised of $69mm) relative to more capital intensive businesses like Content Distributors and Marketplaces (equity raised of $153mm and $100mm). E-commerce companies need to reach profitability quickly because the repeat sale can be infrequent and unpredictable.

“Big” and “successful” aren’t mutually exclusive, becoming one of the largest tech companies in your space will take a lot of capital raised over a few rounds. If you don’t find yourself raising lots of money to fuel growth, a competitor probably is.